Published on Sept 19, 2022Updated on Sept 6, 2023
Business loan refinancing is a very common practice used by business loan borrowers to lower the cost of debt and get favorable repayment terms. Refinancing is nothing but taking another loan to completely repay the outstanding amount of the loan you previously took, at better terms, and/or a top-up amount. A business loan borrower can consolidate multiple debts into one, or balance transfer an existing loan. This also means you can swap all your expensive debts into one affordable debt. But, sometimes, despite the lower interest costs on the new loan, in certain cases, the economics doesn’t favor refinancing business loans. And, lenders can also refuse to refinance business loans if they find any issues with the repayment of existing business loans.
Therefore, before applying for a business loan refinancing with a new/existing lender, here are a few things you should know.
Not all lenders provide business refinancing facilities due to the complexities involved. You should confirm with your lender whether they refinance your business loans or not and whether you get a no-objection certificate (NOC) if any other lender does so.
In case your current lender doesn’t allow business refinancing, there are no other options than to continue repaying as per current terms, at least until you become eligible as per your lender’s policy.
Business refinancing is like raising a new loan to pay off the existing debt and start repaying as per the new terms and conditions Therefore, the cost of refinancing includes processing fees for the new loan, pre-closure charges for the existing loan, and other charges.
Therefore, before applying for business refinancing, you should check whether the savings are greater than the total costs of refinancing.
Business refinancing results in a hard inquiry on your credit report and if the lender finds any issues with the repayment of existing debt, your application for business refinancing will be rejected. It will impact your credit score and make it difficult for you to raise funds for a new loan in the future.
Apply for business refinancing only if your business credit score is in the higher range and you have a clean credit repayment history.
The basic idea of business refinancing is to save interest costs on your existing loan. Therefore, before going for a business refinancing option, compare the business loan interest rate offered by different lenders and other costs. You should be able to calculate the total interest cost savings with the new arrangement before making an application for the same. You can use a business loan calculator to calculate the net savings accurately.
Business refinancing makes sense only when you have a considerable amount of repayment tenure left to service. If you have paid off a majority of the loan amount, the refinancing benefit will be much less and isn't worth the hassle.
Also if you are facing difficulty in servicing your existing business loan, business refinancing doesn’t make sense even with a lower interest rate. Your priority should be to stabilize the finances of your business and make regular repayments to build a reliable credit score.
Most long term business loans are secured in nature. Therefore, you have to confirm with your lender whether or not they need any form of security to collateralise the loan. The assets already provided as collateral for an existing loan cannot be used again for business refinancing. You need to provide additional collateral to raise a new loan for business refinancing.
Check out the documents needed for online business loans before applying for it. The lender may ask for additional documents related to your business to establish creditworthiness and understand the need for business refinancing. For example, how the loan amount has been utilized and the potential benefits towards the growth of business profits.
Business refinancing is a very crucial financial decision for your business and its successful execution is very important. You should choose the option only under the following three circumstances:
Over the long term, refinancing of business loans (if planned and executed successfully) provides multiple benefits in the form of freed-up cash flow, which will help you to generate more profits or re-invest the extra cash flow, flexibility in repayments, and reduced cost of long term financing.
Alternatively, you should also not overlook the disadvantages like how it may impact your credit score, the fees associated with it and that you will have to service the loan for a longer tenure if choosing for a higher repayment tenure.
Therefore, you should consider all the above-mentioned points before making a decision on the refinancing of a business loan.
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